Party Like It’s 2017: Whales and Degenerates of DeFi

Key Takeaways

  • While DeFi has sound long term prospects, it’s currently driven by speculation
  • The number of DeFi users is quickly growing, but it’s still tiny and composed mostly of whales and risk-taking speculators
  • Roadblocks like Ethereum’s limited transactions per second obstruct DeFi’s mass adoption

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The DeFi craze is full-steam ahead: the total value locked has already passed $5 billion, the number of transactions on Ethereum hit 2018 levels, and gas prices are through the roof. Each passing day DeFi is looking more like a bubble.

We discussed the real practical use cases of DeFi with Federico Nitidi, creator of the liquidity pool tracker Uniswap ROI. His insights are valuable for estimating the actual structure of the market and its long-term potential, as well as the short-term risks.

Lending, borrowing, liquidity provision, arbitrage, and fundraising can potentially help the blockchain space disrupt the traditional economy, and big players in the space acknowledge such potential. However, a closer look at them shows that the niche is still dominated by whales and risk-taking speculators, affectionately known as “degens.”

Here’s a summary of the types of activities they do to churn a profit and why this tends to attract degenerates.

DeFi Lending

Lending on DeFi is a proxy to fixed income. Users can lend ETH on platforms like Compound or Aave, and make their capital available for others to borrow for interest.

The annual percentage yields (APYs) on DeFi platforms are lucrative compared to the traditional high-yield savings accounts. For instance, the APY for DAI stablecoin on Compound exceeds 3%, while the highest APY offered by the U.S. banks is 1.05%.

In addition to attractive yields, platforms like Compound incentivize users via the daily distribution of COMP governance tokens. The inclusion of COMP reward increases the APY to almost 6% in some cases.

Importantly, lending rates in DeFi come from the demand of margin traders and…

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